JPMorgan, Citi Units Sued by FDIC Over Colonial Sales

The Federal Deposit Insurance Corp. sued banks including JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C) over $388 million in securities sold to Colonial Bank.

The FDIC alleged that the banks misrepresented the quality of the loans underlying residential mortgage-backed securities that Colonial purchased, according to a complaint filed today in federal court in Manhattan.

The misrepresentations included inaccurate loan-to-value ratios based on inflated property values, according to the filing. Also, many of the properties at issue had second mortgages that weren't disclosed, the FDIC said.

"In many cases, the amount of the undisclosed additional liens was much greater than the owners' ostensible equity, putting the owner 'under water' on the day on which this securitization closed," the FDIC said in the complaint, filed by attorneys David J. Grais, Mark B. Holton, Leanne M. Wilson and Maria Heifetz.

Colonial Bank, of Montgomery, Alabama, was closed by the Alabama State Banking Department on Aug. 14, 2009, and the FDIC was named as a receiver for the institution, according to the FDIC's website.

The case is Federal Deposit Insurance Corp. as receiver for Colonial Bank v. Chase Mortgage Finance Corp, 12-cv-6166, U.S. District Court, Southern District of New York (Manhattan).